Calculate the value of nine month American call option on a foreign currency using a three step binomial tree The current exchange rate is 0 79 and the strike price is 0 80 (both expressed as dollars per unit of the foreign currency) The volatility of the exchange rate is 12 per annum The domestic ...

The tree is shown in Figure S1211 The cost of an American option to buy one mi ...

Calculate the value of nine-month American call option on a foreign currency using a three-step binomial tree.

Question:

Calculate the value of nine-month American call option on a foreign currency using a three-step binomial tree. The current is 0.79 and the is 0.80 (both expressed as dollars per unit of the foreign currency). The volatility of the is 12% per annum. The domestic and foreign risk-free rates are 2% and 5%, respectively. Suppose a company has bought options on 1 million units of the foreign currency. What position in the foreign currency is initially necessary to hedge its risk?
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...